Oil prices witnessed volatility on Monday, following a significant surge of 7 percent on Friday. Renewed strikes by Israel and Iran over the weekend have raised concerns that the conflict could expand throughout the region, potentially disrupting oil exports from the Middle East.
Brent crude futures increased by 64 cents, or 0.86 percent, to $74.87 a barrel by 05:07 GMT (currently trading above $74.85), while U.S. West Texas Intermediate crude futures rose by 76 cents, or 1.04 percent, to $73.74 (currently trading $72). Earlier in the session, prices had spiked more than $4 a barrel before briefly dipping into negative territory.
Both benchmarks had settled 7 percent higher on Friday, having jumped over 13 percent during the session, reaching their highest levels since January.
Recent developments in the Middle East have heightened concerns regarding potential disruptions to the Strait of Hormuz, a crucial shipping route. Approximately one-fifth of the world’s total oil consumption, or around 18 to 19 million barrels per day (bpd) of oil, condensate, and fuel, transits through the strait.
Read more: Oil prices surge over 8 percent as Middle East tensions escalate
OPEC’s spare capacity and market response
Markets are closely monitoring the possibility of disruptions to Iranian oil production due to Israel’s strikes on energy facilities. Increased fears of a blockade in the Strait of Hormuz could significantly elevate prices, as reported by Reuters, citing Toshitaka Tazawa, an analyst at Fujitomi Securities.
Iran, a member of the Organization of the Petroleum Exporting Countries (OPEC), currently produces around 3.3 million bpd and exports over 2 million bpd of oil and fuel. The spare capacity of OPEC and its allies, including Russia, to increase oil production to offset any disruptions is roughly equivalent to Iran’s output, according to analysts and OPEC observers.
“If Iranian crude exports are disrupted, Chinese refiners, the sole buyers of Iranian barrels, would need to seek alternative grades from other Middle Eastern countries and Russian crudes,” Reuters reported, quoting Richard Joswick, head of near-term oil analysis at S&P Global Commodity Insights. “This could also boost freight rates and tanker insurance premiums, narrow the Brent-Dubai spread, and hurt refinery margins, particularly in Asia,” Joswick added.
